TMI Blog2009 (1) TMI 365X X X X Extracts X X X X X X X X Extracts X X X X ..... Modi has strong background in finance and tally, being basically financial management software, and therefore, he is providing the necessary consultancy services. Mr. Modi is also involved in (a) recasting the organization structure including greater empowerment to the regional offices in India and abroad; (b) recasting in product road map with specific focus on upward scalability of the products; (c) assessment of existing strategies and product portfolios and correct positioning and distribution methodologies. Mr. Modi reviews and assesses the impact of implementation after every quarter and thereafter, recasting long-term strategies of the company. Mr. Modi is associated with Reliance Group of companies. According to the assessee, the fees paid to him is Rs. 10 lakhs per month, which is very less as compared to the market. Mr. Modi has experience of more than 20 years. It was stated that fees paid to him is very reasonable considering the market factors and his capabilities. The assessee also enclosed copy of the submission made on 21st March, 2004 during the course of assessment proceedings for the asst. yr. 2001-02. The AO has reproduced the extract contained in the letter dt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n details in respect of Mr. Modi so as to justify the payment of Rs. 1.7 crore to Mr. Modi during the asst. yr. 2001-02. The learned Authorised Representative has enclosed copy of letter dt. 26th March, 2004, which was filed before the AO. In para 7 of this letter, the assessee gave the details and justified the consultancy charges paid to Mr. Manoj Modi for the asst. yr. 2001-02. The AO has also reproduced the content of the letter in his order. It was also mentioned in that letter that Mr. Modi played a vital role in the investment of the surplus funds of the company and as a system specialist, provides inputs for the future development of the company's product. As a result of his involvement, the turnover of the company increased substantially. The learned Authorised Representative thereafter drew our attention to the assessment order for the asst. yr. 2001-02. Vide that order, no disallowance was made in respect of consultancy charges paid at Rs. 1.7 crore to Mr. Modi during the asst. yr. 2001-02. The learned Authorised Representative submitted that the Revenue should have taken a consistent stand. There is no change in the facts during the assessment year under consideration a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cified in s. 40A(2)(b). The learned Departmental Representative therefore argued that the expenditure has been partially disallowed in view of s. 40A(2). 2.6 We have heard both the parties. The AO vide letter dt. 27th Nov., 2006 made the following query: "You are paying Rs. 1,22,79,600 to M/s McKinsey Company, Rs. 1,20,00,000 to Mr. Manoj Modi and Rs. 45,36,000 to M/s Absolute Communication. These payments have been done for professional fees in connection with consulting assignment, corporate strategic consulting, advertisement retainer, respectively. It is not clear from the details filed as to why these payments have been done by the company. You are requested to submit the details of services rendered by them. What is the benefit company has derived from these services? How these expenses are admissible under s. 37 of the IT Act?" From the above, it is clear that the learned AO required the assessee to give the details of services rendered and to give the details of the benefits which the company has derived from the services. The reply has been submitted by the assessee vide letter dt. 6th Dec., 2006. That reply has been reproduced by the AO at pp. 6 and 7 of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case of Director of IT (Exemptions) vs. Escorts Cardiac Diseases Hospital Society (2008) 300 ITR 75 (Del) observed at p. 77 as under: "We are in agreement with this but when there is absolutely no change in facts, a mere change of opinion will not entitle the Revenue to pick and choose the assessment year in which an appeal should be filed. The principle of consistency, which was propounded by the Supreme Court in Radhasoami Satsang vs. CIT (1991) 100 CTR (SC) 267 : (1992) 193 ITR 321 (SC) has been followed by this Court in several cases." 2.8 The AO has disallowed the expenditure under s. 37 of the IT Act. The Hon'ble apex Court in the case of S.A. Builders Ltd. vs. CIT(A) (2006) 206 CTR (SC) 631 : (2007) 288 ITR 1 (SC) had an occasion to consider the meaning of the word 'for the purpose of business'. The Hon'ble apex Court agreed with the view taken by the Delhi High Court in the case of CIT vs. Dalmia Cement (Bharat) Ltd. (2002) 174 CTR (Del) 188 : (2002) 254 ITR 377 (Del), in which it was held that once it is established that there was nexus between the expenditure and the purpose of business, the Revenue cannot justifiably claim to put itself in the armchair of the busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he CIT(A) himself has chosen to increase the same to 6 per cent and only 4 per cent is disallowed. Even that 4 per cent is not absolute and it is after deductions in terms of agreement. Taking into consideration the longstanding relationship and also taking into consideration the reputation of the brand and the agent and also taking into consideration that there is no intention to avoid tax, the Tribunal rightly in our view has chosen to accept the case of the assessee with regard to 4 per cent commission. We therefore do not find any unreasonableness in the given circumstances. In fact this Bench recently has chosen to consider somewhat a similar case in ILR 2006 KAR 2459 and thereafter this Court has chosen to hold that reduction from 5 per cent to 2 per cent is an arbitrary reduction. An overall view of the matter would compel us to confirm the order of the Tribunal in the given circumstances." 2.10 The Board vide Circular No. 6P, dt. 6th July, 1968 explained the provisions of s. 40A(2). In that circular, it was mentioned "the ITO is expected to exercise his judgment in a reasonable and fair manner. It should be borne in mind that the provision is meant to check evasion of tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e instant case, there is no material before the AO for disallowing the expenditure. The AO never required the assessee to produce evidence but only asked to give the details of the services. Such details were filed and there is nothing on record to say that there was some material to come to the conclusion that expenditure could have been disallowed under s. 40A(2). 2.13 The Delhi Tribunal in the case of Gujarat Guardian Ltd. vs. Jt. CIT (2008) 114 TTJ (Del) 565 : (2008) 1 DTR (Del)(Trib) 328 had an occasion to consider the allowability of enhancement of commission to 12.5 per cent as against 5 per cent originally fixed to a person covered under s. 40A(2). The Hon'ble Delhi Tribunal held that once it is clear that services have been rendered by the agent, the quantum of commission that has to be paid is purely the discretion of the assessee and the Revenue cannot sit in judgment over the same. In the instant case, there was a resolution passed by the board of directors on the basis of the discussion of the managing director with Mr. Modi. Mr. Modi agreed for a quarterly payment of Rs. 30 lakhs. Once the nexus between the expenditure and the purpose of business is established then ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he above. I find that the expenditures made on (i), (ii) and (iii) are on capital asset. Whether these assets are used by the R D unit for the purpose of upgradation or not is finding of fact and no finding has been given thereon by the AO even if the same argument was forwarded by the Authorised Representative at the time of assessment proceeding. Even the assessment order does not give any reason why the expenditures shown above at (i), (ii) and (iii) be not allowable under s. 35(1)(iv) of the IT Act. I therefore hold that these were used for research of upgradation of tally solutions accounting packages. Since admittedly these were capital in nature, I allow them under s. 35(1)(iv) of the IT Act. The additions are deleted. The AO is however directed to withdraw the relief of Rs. 11,35,977 under the head depreciation allowance given to the appellant in the computation of income." 3.3 On the above-referred issue, we have heard both the parties. The AO in his order has accepted that the assets used were the means for the development of the software. The AO has disallowed the expenditure by presuming that only revenue expenditure is allowable. However, the capital expenditure incu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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